5 rules of financial management that will increase the value of your ICT business
Whilst a trade buyer's desire to acquire your ICT business will be driven by the strength of your service contracts and operational prowess, their valuation will always be based on your financial performance. It is paramount to provide them clear financial information so that they can make their best offer.
1. Forecast your next year's revenue and profit
A buyer will almost always argue the price based on the performance of your business to-date rather than the future they are buying. Ours and your task is to sell them your business on its strength as an ongoing concern and the often significant uplift in profitability through putting two companies together.
If you can provide 12 month forecast backed-up by a list of client contracts and justifications for the remaining assumptions, this will draw the buyer's attention to the future revenue and potential for growth.
Valuations for ICT companies which derive a significant (over 70%) and growing portion of revenue from service contracts, will typically by judged on the current run-rate, rather than previous years.
2. Produce monthly management accounts
Put in place a management accounting system that can tell you month by month the revenue, costs and profits from each client and revenue stream. This will add credibility to your forecast for the following year.
A clear presentation will show buyers that the business is under control. It will also add credibility to your forecast for the following year. Use a recognised accounting system.
3. Know and be able to show where your revenue is derived from
Divide out your revenue by service provided and by client. You need to be able to prove that your business is not over dependent on one client. Looking back to the multiple of revenues valuation method, set-up your management account system to monitor the following revenue streams:
- IT / telecoms systems support contracts
- Managed services (email, back-up etc) - provided in-house
- Managed services (email, back-up etc) - outsourced
- Consultancy and installation projects
- Telecoms billing (Commission based)
- Telecoms billing (Re-sales based)
- Hardware and software re-sales
4. Ensure your clients settle payments on time
Ensure your clients are up to date with their payments and continue to pay within your invoice payment terms. Buyers will not want to take on clients with a history of late payment. For regular service contract payments, set-up a Direct Debit facility with your clients. If possible, invoice your regular monthly services in advance to maximise your cash flow.
5. Make your accounts transparent
Maximise profitability, ensure all revenue is recorded, reduce non-core expenditure, and remove private assets. The fewer adjustments that we need to make to assess the total earnings that a buyer could achieve, the more credible our valuation.
Good information and accounts will give you a competitive advantage in selling your business.
This article originally appeared as part of our series of e-Tutorials for the Sale of IT Support & Telecoms Companies.